a16z Podcast - 2024 Big Ideas: Voice-First Apps, AI Moats, Never-Ending Games, and Anime Takes Off

Episode Date: December 15, 2023

Voice-First Apps, AI Moats, Never-Ending Games, and Anime. We asked over 40 partners across a16z to preview one big idea they believe will drive innovation in 2024.Here in our 3-part series, you’ll hear directly from partners across all our verticals, as we dive even more deeply into these ideas. What’s the why now? Who is already building in these spaces? What opportunities and challenges are on the horizon? And how can you get involved?Timecodes:00:00 - Big Ideas in Tech 202401:39 - Big Idea: Voice-First Apps Will Become Integral to Our Lives04:14 - The limiting factors of voice technology05:27 - What would a voice-first app look like? 06:52 - Voice tech for companionship and productivity 08:05 - The primary modality voice applications10:08 - How builders and founders can integrate voice technology13:31 - Big Idea: The Consumer AI Battleground Moves from Model to UX15:49 - How user experience can contribute toward building a moat17:57 - The commoditization of models19:55 - How should builders differentiate between model and experience?22:58 - Breakout examples for 202425:10 - Open source vs closed source26:44 - The impact of applications splitting from the infrastructure layer28:14 - Big Idea: AI-First Games That Never End29:59 -Generative AI in gaming and AI native games31:12 - Introducing generative agents as game companions 33:57 - Does the gaming community want hyper personalization?38:00 - New entrants vs the incumbents41:57 - How business models and cost structures are evolving46:21 - Advice for game builders in 202448:03 - Big Idea: Anime Games Go Mainstream49:28 - What defines anime?52:05 - Anime’s monetization strategy and how it differs from other genres54:04 - Why are we seeing a rise in anime?55:56 - What is required to be successful in anime58:20 - AI, XR and inventing the next wave of anime Resources:View all 40+ big ideas: https://a16z.com/bigideas2024 Stay Updated: Find a16z on Twitter: https://twitter.com/a16zFind a16z on LinkedIn: https://www.linkedin.com/company/a16zSubscribe on your favorite podcast app: https://a16z.simplecast.com/Follow our host: https://twitter.com/stephsmithioPlease note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures.

Voice is the way that humans have communicated with each other since really the day that communication was born. But voice has never really worked as an interface for technology. Ten years ago, I probably would have called that experience magical. The exciting thing is that this first wave is already happening right now. It's not a theory, it's reality. Anime is just able to combine many different types of player profiles because a lot of people like anime and there's a lot of different player types. An awesome user experience can raise.

is switching costs, strengthen network effects, and empower a brand. You've just got to start building. Dronesforming. Reinventing early education with AI, plus AI companions going 3D and games that may never end. We asked investment partners across A16C to preview one big idea that they believe will spur innovation in 2024. And from this exercise, our team compiled a list of 40-plus builder-worthy pursuit. that you can find at A16Z.com slash Big Ideas 2024, or you can click the link in our show notes. But today, we continue our three-part series as we look forward 2024 together,

with our partners across all our verticals, from bione health to games to American dynamism and more. So in part one, we covered what it'll really take to democratize, quote, miracle drugs like GLP-1s, but also programmable medicine's final frontier and AI interpretability. On deck today, we discuss how AI and other tech trends are being applied to the world of consumer and games. For example, is voice finally having its moment? And will foundational models or UX win in the AI battleground? Plus, what made the games of the future look like? Listen in to find out.

As a reminder, the content here is for informational purposes only. Should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security. and is not directed at any investors or potential investors in any A16Z fund. Please note that A16Z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, including a link to our investments, please see A16C.com slash disclosures. First up, after over a decade of heavy investment, our large language models finally the unlock that we needed for voice first apps. And if so, what will this shifting interaction modality mean for both new and existing products?

Hi, I'm Anisha Charya. I'm a GP on our consumer investing team, looking at all things AI apps. My big idea for this year is that voice will actually be a new sort of emerging way to interact with technology and at the heart of a new set of productivity apps. So the theory here is that voice is the way that humans have communicated with each other since really the day that communication was born. But voice has never really worked as an interface for technology. And I think one of the reasons for that is that when you interact with a product using voice, you sort of have the unconscious expectations that you would have of a human. So you expect it to actually be pretty flexible, cognitively sophisticated, and really be able to interact with you. And most of the systems that exist today, or at least have historically

existed, are very inflexible. There's just these sort of logic trees. And if you don't navigate them perfectly, then they just don't work. And we've all experienced that with Alexa and some of the past generation voice assistance. So I think the go-forward idea is that AI and large models really unlock humans' ability to interact with technology. I think the other thing that's very interesting for productivity apps is that you could imagine some of the incumbent productivity providers, Gmail for email, for example, they're going to build a lot of the obvious AI features for those apps and experiences, but it's less

obvious that they would prioritize something that's voice first because it requires you rethinking the entire experience from the ground up. So I really think it's an interesting area because it has previously never worked and now this technology allows it to work and it's not something the incumbents are obviously going to build. So that's what I expect to see, hope to see, and invest in in 2024. All right, so Anish, I feel like that sounds really exciting, but voice has been pending for quite some time. You addressed this a little bit, but I actually went back, I looked up the Gartner hype cycle over the last decade, speech recognition popped up in 2010, and that was actually in the plateau of productivity. And yet, despite a lot of

investment from a lot of big companies, we're talking Amazon, Google, Apple, feels like we're still waiting. And you address that maybe there's some new technology on the horizon, but what would you say has been the limiting factor thus far? I mean, it's simply that the old technology architecture doesn't allow you to get to the level of fidelity that you need. So if you look at it, kind of the last 10% is where 99% of the effort goes. And this is true of a lot of AI problems that were built on the old architecture. So, you know, self-driving is a great example of this. True interactive voice is a great example of this.

You can get to 90%. You just can't get to 99%. And this new technology really lets you get to 99%. And you can see that if you've interacted with chat GBT via voice, it's very compelling. If you used 11 labs, I mean, their work is very compelling. So it's clear that this now works. And really what we needed was a technology shifts, not a, sort of set of like financial resources that incumbents have historically provided to make this

work. Yeah. And you mentioned that existing apps aren't necessarily equipped to build these experiences. Maybe you could just elaborate on that and maybe also think through what would a voice first app even look like? So first, existing apps are built with a set of existing workflows. And anytime you modify the workflow, you have to think about how that affects all of the existing users. I'm sure there's a lot of creative people at Gmail, but it's very very, hard for them to go to a dramatically different paradigm like a superhuman. And of course, we will try this with inbox and ended up shutting it down. But there's a set of consumer expectations and a huge audience that just expects a product to work a certain way. And to do

something like a voice first inbox, for example, you're just going to need a completely different set of workflows. So if Google does decide to do that, they're going to have to start from scratch along with everyone else. So it's not obvious to me that an incumbent will build this. In terms of what the experience would look like, a great example is a lot of executives that I know when they're driving into work in the morning, they'll phone their executive assistant and they'll say, hey, let's go through my inbox together. Let's talk about what seems like it's a priority, what seems like it's important but not urgent, what's clearly spam, what are internal versus external asks. And they will together sort of prioritize so that when that executive arrives, they're sort of ready to go with everything they need to do. So an experience like that, I think, would make enormous sense, except now it's a available to everyone, not just executives who have a dedicated assistant. Yeah, definitely. And you mentioned two specific areas that you're looking to in 2024, including companionship and productivity.

Here's to know what you're already seeing built there. Are you already seeing builders create apps that are live and working and our voice first? Yeah, there's a lot of cool exploration that's happening in the voice space. So one of the ones that I'm the biggest fan of is a product called Tab. So Tab has gotten a bunch of heat. online, and it's a very interesting founder and a very interesting product idea, where it's a pendant that you wear that sort of passively captures your conversations throughout the day.

And then it allows you to interact with all of that context, ask questions, ask it to summarize. So it's a great example of someone who's really thinking about this from a first principles perspective, a voice first perspective. The second most interesting product outside of something like 11 is actually just chat GPT's voice module and their voice sort of interface. so I encourage everyone to go take a walk and just have a chat with chat GPT and you'll be amazed at how quickly

you sort of forget that you're talking to an AI and you fall into the full of a conversation. So I'd say between Tab, chat GPT and certainly what the T-Mat 11 is doing, there's a lot of cool stuff to check out. Yeah, and as this tech gets better, I think what I'd love to hear your perspective on is really like the unexpected type of experiences

that right now don't seem obvious. But I mean, I think it's easy for people to imagine, oh, yeah, I can send an email. Oh, yeah, I can start a song with my Alexa. But if we're really talking something foundational where voice becomes the primary potential modality for interacting with some of these applications, what might we imagine to be on the horizon? That's a little more significant than what we imagine with Voice today. I mean, it's trite to cite this, but I will anyway, which is simply the movie Her. like that's it, which is a passive sort of experience that has all the context that you have where voice is the primary modality of interaction and then you can fall back to a screen

if and when needed. So if we look back in 10 years and that's the way that we interact with technology, it won't feel like such a leap. I think the important question then is that currently is not the primary modality. And so you have all of these companies who really rely on a website or an app or a graphical user interface, which may become moot if we really are moving in that direction. I mean, curious to know your perspective there on how builders should be thinking about that potential paradigm if it really is voice first. Like, how do existing companies integrate this thoughtfully? I don't know if it is moot. I think that there's room for both. There's a lot more technology penetration to be had. So if you're a developer and you work in

an IDE, you're probably faster hands-on keyboard with screen than you're going to be with voice, at least for now. And maybe the answer is some combination of the two. So I think that there is a lot of room for existing products and existing sort of modalities for interaction. On the other hand, if you're maybe a senior citizen, you simply, I mean, maybe you're interacting the technology, but you're really struggling with it. And this unlocks every product for you, potentially. So I think it's a market expansion positive sum story, not a zero sum story. But I tend to always think that. Yeah, no, I agree.

I think it's positive some, but how would you, for example, if you're an application that does not have a voice-first interaction mode, should all builders be thinking about that in corporation? Or how would you think about that if you're an existing builder without this on your roadmap? I think the customer and the sort of interaction pattern is so different that if I had an existing product, I would probably focus on playing from my place of advantage, which is non-voice workflows rather than trying to rethink

my product from the ground up around this. And look, the answer may be in the middle where there actually are some workflows that are voice-enabled that extend the existing workflow. But again, I think this is a sort of like a market expansion net new customer story rather than someone taking existing.

Yeah, and if founders are thinking about creating in this new environment, are there any challenges you'd call out from your experience with some of these tools like 11 labs in terms of just maybe where we are in this arc and what can and can't be done. Look, I think you have to retrain people. They need to know how to interact with these systems. And by default, their expectations are going to be very high.

It's going to be like, look, I should be able to interact with this in the exact, with the same level of fidelity and responsiveness and sort of flexibility that I can with a human. So if that's not what you're able to offer or what you intend to offer, then it will require sort of training your customer to interact with you in the right way. So I do think that there's an onboarding question. And then, look, I think there's also just sort of a social patterns question where is it going to be socially acceptable to be sort of talking into thin air? Now, arguably, people are already doing that with their sort of Bluetooth and AirPods.

And so maybe we'll all change quickly together as a society, but I think there'll be some period of time for which the early adopters are going to feel a little crazy or that they look that way. You know, it's so funny you mentioned that. My husband's grandmother said the first time she ever heard someone talking on a cell phone, she thought they were crazy because they were doing it in the supermarket. And she was like, why are they talking to themselves? So maybe there's an element of that now again. To round things out, seems like there's a lot of opportunity on the table. We're talking about potential change and interaction modality. If you're an entrepreneur, how would you even think about starting? What would you look at? Tell me a little bit more about where you would begin. Obviously, it's tautological that you can only begin at the beginning. I think it's impossible to infer what the end product is going to look like, and you've just got to start building. So I think I would try to build something useful and interesting

and just iterate from there. That's it. Look, I think the other thing that's interesting here is that some of these technologies, if you're too pointed at the beginning in terms of product design, then it can constrain you. I think that if you introduce the capability in an intelligent way, your customers will pull you in a direction. I think some of the best product builders I've seen

have been willing to try to offer the capability in a way that is relatively neutral and allow the customer set to pull them. Yeah. And per your advice earlier, for people to play around with this tech themselves and to use voice more. 100%. Always. Just use their products. Just use the products.

Awesome. Well, this has been fascinating and I cannot wait to use more voice in the technologies we use daily. So thank you so much for sharing this, Anish. You got it. Thanks, Steph. Next up, we address the quickly evolving AI battleground. Since ChatGPT came out just one year ago, builders are constantly asking where moats will arise.

And A16C partner, Alex Zimmerman, thinks the differentiator may actually lie in user experience, not the foundational models. Hi, I'm Alex Zimmerman, a partner on our growth fund here at A16Z. and my big idea for 2024 is the Consumer AI Battleground is going to move from the model to U.S. Overheard in 2023, a minute not spent building the model

is a minute wasted. Build the best model, and the users will come. The most popular consumer AI companies thus far have been the producers of their own models, such as ChatGBT, TBT, character, Bard, and Midgerney. Differentiation has come from being the best model in their domain, mid-journey with images, character on entertainment, chat gbt on overall text. UX has largely been determined by the fastest way to get the models in the hands of users.

But thanks to a combination of factors, the likelihood that chat shortages is, the availability of most foundation models via API, an increasingly powerful open source model, The groundwork is there for breakout consumer apps to be built on someone else's model. In 2024, consumer AI apps will break out by delivering the best user experience around unique use cases, less on model performance alone. I'm particularly excited for consumer AI apps that figure out how to include shared experiences in a multiplayer mode, aggregate multiple models, into a single interface, or build more focused solutions where workflow and process drive value.

LLMs can be a source of differentiation. Today, they might provide a first mover advantage, but old-fashioned modes like network effects, high switching costs, scale and brand will likely win long term. All right, Alex, since last year's AI consumer boom, people are constantly asking this question, of where moats will arise. I feel like every podcast we do on the topic, I have to ask that question, really, where is the differentiator? And a lot of people did talk about models, but you're saying that here, UX really might be the moat. So why do you think that is? And also, what would you say to pushback that maybe it might not be a moat given that design or UX feels like it can

be copied easier than ever? Sure. Over the history of technology paradigms, we often see technology, progress, and features first, and then a movement toward prioritizing design and experience. I expect user experience to contribute toward the building of modes. An awesome user experience can raise switching costs, strengthen network effects, and empower a brand. So maybe if you think about the last paradigm shift with mobile, if we were to rewind in the clocks to 2010. People were taking photos with their new, powerful phones.

There were many photo filtering apps. I remember Hipsomatic. There were social media apps like Facebook. But there wasn't a great experience that bridged the two. Instagram came along. It brought a slick interface. It was simple to take photos, edit, share photos.

Ten years ago, I probably would have called that experience magical. My photos, my friends, they're all there. And suddenly, the likelihood of me switching to another application that doesn't have that information is lower. Why would I switch? The experience is so good that my friends and I, we use the application more, which in turn makes it better, strengthening the network effect. In AI, we're starting to see consumers build really exciting applications on top of this new technology, and I think they will leverage user experience UX to establish similar modes to their predecessors.

I think that makes sense, but I think what some other people might ask is if everyone has access to all of the same models as they do become more accessible, how do new players really win in this environment? It's important to point out that virtually everyone already has access to open AI or anthropic. But there are real costs associated with using these models. So unless you're very well capitalized, it's difficult to run a free consumer app and afford the associated inference requirements. For this reason, many of the current AI consumer apps actually use a subscription or a transaction model to cover the costs. They are beholden to charging consumers. What's changing now

is we expect the costs to access quality models, whether closed source or open source, to fall. Developers will be able to build more affordably for a broader set of consumers. It widens the top of funnels for these developers and presents a much broader opportunity. One framework to consider is that models are just a new primitive

to build applications on top of, the same way storage is or geolol, location or payment rails are today. So if you believe in the commoditization of models, you could argue that models are similar to ACHRELs in financial services. A fintech company has to distinguish itself with user experience and workflows around ACH, just like consumer apps will need to with these models. Yeah, so in a way you're saying a lot of people think that

as this becomes more democratized than the incumbents win because they have the financial resources and the existing users. But really, you're saying that we expect those economics to change. Maybe another piece of pushback from folks would be, how do you avoid, as folks say, just becoming a rapper, right? And being displaced by certain model providers like Open AI. I think a meme on the internet is every time Open AI has a demo day, a bunch of startups get wiped out. I don't know how factual that is. But how should builders really think about differentiating through model versus experience? A classic investor question for many years has been, won't Amazon do this?

Now it's quickly becoming, won't open AI do this? Entrepreneurs should focus on where they are uniquely best positioned. That's not specific to AI, but in general for company building. A recent historical parallel would be with cloud computing. should entrepreneurs build their own infrastructure or should they work with AWS, GCP, Azure? For most founders, they should work with a third party. If founders believe that their team's core strength

is their ability to build a truly differentiated model, sure, that is a worthy endeavor. But there are a few companies with that caliber of a research team today. It's true with Character AI, Idiogram, The list is short. For most companies, that's not going to be the case. But fortunately, building a defensible business

does not have building a model as a prerequisite. There are other ways to make it difficult for your users to never want to leave your application. With regard to wrapper companies, most rappers today are just providing a user interface to call a model API. You really need to add value on top of the underlying model. My colleague Jamie Sullivan would say it's the difference between being one of the hundreds of Compass apps in the app store and Uber,

using the geolocations of a smartphone to build an application that wasn't possible before and for which underlying infrastructure is not a threat. In the AI context, I'm a fan of perplexity, which is an AI, powered research assistant, it does work with third-party models, but it also offers a lot of seemingly small features that add up to a compelling user experience. Lower latency, providing sources, suggesting follow-up questions, giving multimodal responses. This results in a fun, a different search experience that users can't find with just using a model. Yeah, I love that Uber example. I feel like it really cements the idea that a model is not the starting point for many,

and you can actually add value on top of that. If folks are convinced by that, and they're saying, okay, I don't have to create my own model, but I can create something of value with a differentiated user experience. You mentioned a couple ideas there, like multiplayer modes, interfaces that aggregate several models. Could you maybe elaborate on that? What are you seeing as examples of really creative experiences,

like the equivalent of Uber with geolocation that you've seen already and also maybe some breakout use cases that you'd like to see in 2024. I'm really excited about this. First example, Quora's AI product, Po, covers both multiplayer modes and model aggregation. So on the aggregation front,

Poe brings together leading models like GBT, Claude, Bard for text, stable diffusion, Dolly, for image. and many others. And so if you want a central place to access the many models that are popping up each and every day, Poe is that web browser for AI.

But then I can also use it with friends. So when I ask a question of GBT4 on PO, I can then share it with you, Steph, and you can continue the conversation in Poe. Looking ahead, these shared experiences are going to go from just being text to being multimodal. So imagine Steph, you and I

we're having this conversation, but we're having it with an AI as well. And the AI is not just answering and listening to the text, but it's also listening to our speech. It's responding with their own AI voice. Poe actually recently added voice input. We're going to have more realistic AI friends. This should also translate to gaming.

So you and I, we're playing Fortnite, we're playing Roblox, and all of a sudden, the non-player character, the NPC, who's listening in, watching our gameplay, starts having a unique, personalized conversation with my friends and me. I think that's just going to be a lot of fun. It's going to be so fun. And what's also going to be fun is we can only dream up a fraction of these experiences, right? And as all these builders go out and explore, I think we're going to see all types of. things that we never could have imagined today. One other thing you've mentioned in your big idea is the powerful nature of open source models. And I'd just love to get your take on how key that will be to driving some of this change. To what extent do you really feel like open source

may become the industry norm underpinning many of these products that are soon to come? Clem, CEO at Hugging Face, a few days ago forecasted that in 2024, open source models are going to reach the level of the best closed source models. That may be aggressive for 2024, but they are headed towards parity. Several of the leading open source models like Lama and Mistral are already competitive with the closed source equivalence. It's early to call how the open closed source will split, but the better the open source models get, the more pressure it will put on the closed source models to lower cost. What I'm confident about is the cost to access models going down and they're being broadly accessible. There is so much early activity happening already on top of

open source, which I mentioned can be much more affordable and allow for free and broad consumer adoption. Two fun image applications are Everard and Can of Soup that productize fine tuning to a specific style are people. Yeah, like we said, I think there's going to be a lot on the horizon, and I feel like open source really democratizes that, and the more entrance, the better. As we really think about how the product layer may be increasingly delineated from the infrastructure layer, can you maybe think through some second order effects there? And that could be applying to existing or new companies that we're referring to. So as the application and infrastructure or split, that'll make it a lot easier for new companies to be built.

Founders can just build for applications and not have to worry as much about the underlying model as an input to their own company creation. This is akin to the mobile phone being introduced and making it so much easier for gaming companies to handle distribution via the app store. If there's one last major feat to building a big company, it attracts that many more builders. Beyond that, much like Uber and Snapchat could not have been predicted when the iPhone came out, we don't know what Gen AI will bring, but we're excited. It's going to be some fun, sometimes weird, hopefully always impactful new behaviors. AI will save the world. What a place to end off. No, I think if we were to take one thing away, if it's true that you do not

need to build a foundational model to participate, there are just so many more people that can participate, which is what we want, right? We want more entrance. We want more people exploring this new technology. And what will widespread economically sound AI mean for games? Could it mean highly personalized, real-time rendered games that actually never end? Well, A16Z partner, Jonathan Lai, thinks that may be the case. Hi, everyone. I'm Jonathan Lai. I'm a general partner on A-16-Z games, and my big idea for 2004 is AI First Games that Never End. So in 2024, I believe we'll see the first cohort of AI-first games

from creators that by which large language models to enable novel game systems and mechanics. And while much of the early discourse on generative AI in games is focused on how AI can make game creators more efficient, I actually believe the largest opportunity long-term is on leveraging AI to reinvent the nature of the games themselves. So creating never-ending games that engage and retain users for a very, very long time. A couple of examples of this, generative agents powered by large language models,

can create incredibly lifelike companions in emergent social behavior, terrible charging games that heavily utilized non-player characters or NPCs, Postalized character builders and narrative systems will enable every player to have a fully unique and personalized play-through of their favorite game, and in the game worlds themselves, will no longer be rendered, but actually generated at runtime using neural networks. A new player onboarding itself is poised to be reinvented. And in my idea is that every game will potentially be redesigned around an AI co-pilot with the mantra of good alone, great with AI, and best-profileged. All right. Great. So Jonathan, you mentioned several opportunities, or even you could say fundamental shifts in game development, from never-ending worlds to convincing NPCs to personalized real-time rendering. I don't know which of these upgrades you are already seeing built, perhaps, and also which you're most excited about. Yeah, so we generally think of the AI revolution in games is happening in two waves. The first wave is building the same game, but faster and higher quality.

with AI tools and infrastructure to empower game developers. But the exciting thing is that this first wave is already happening right now. It's not a theory, it's reality. So we surveyed 230 game studios earlier this year. I mean, it turns out that 87% of them are already using generative AI tools. And so some of the products that they named include chat GPT, mid-Journey, 11 labs, KDEM, Adobe Firefly, GitHub co-pilot, etc. And the majority of these studios rated the impact of these tools as transformational, which is pretty incredible.

The second wave, which we consider even more exciting, is building entirely new sets of AI-native games that are uniquely enabled by AI. And those are the examples I write about in my big idea for 2024. And so dynamic worlds that can be generated in real-time based upon a player's actions, life-like AI companions, never-ending to choose-your-own-eventure games. we're still very early in seeing what there's new AI native game experiences might be like. And so you've seen a couple of prototypes, some interesting sort of proof of concepts. But in general, the playing field is wide open, and that's the exciting thing. For the folks that do get it right, these are the ideas that can potentially create entirely new genres that captivate hundreds of millions of people.

And that's what we're incredibly excited about looking out in the 2024. Yeah, I think what you're picturing is really important because What you're saying is, is we're not just incrementally optimizing existing games. You're really describing a fully new game environment, fully new way of thinking about games. And I love this mantra that you included, which is good alone, great with AI, and best with friends. Can you elaborate on what that means and maybe how it shifts or has the potential to shift the way that people currently think about both building games and also playing games? So many of the biggest games in the world today, you think about Fortnite, Call of Duty, League of Legends, they utilize AI primarily for onboarding and practice.

And so before you play against real human opponents, you might play against AI bots. And they enable you to practice, build confidence, learn all the controls, get your hand-out coordination down. And so it's sort of a warm-up before you jump into the real game, quote-unquote. I think one of the promises of generative agents is an elevating agents like the AI agents from a warm-up into the core game itself. And so one example of that that I find fascinating is this concept of an AI companion for every game. So let's say at the beginning of a game, like you're starting Call of Duty, for example, you might customize your character, and let's say you also customize an AI companion that you can bring with you into the game.

And this companion can play the entire game with you, right, either is on the same team or against you if needed, and it might comment on the experience, it understands the world around it, it keeps your company, When your friends aren't there to play with you, it learns from all of your preferences over time and helps you out and generally tries it's best to make sure that you have a great time. And so such an agent wouldn't replace playing of humans, but it would certainly be better than playing by yourself. And so that's what I mean by designing games that are good alone. They can be played single player. They can also be played with an AI, and it's great with AI. But of course, it's best if you have human friends to play with.

And those different modalities can be mixed and matched, right? Depending on the game and depending on the time. What gives you the confidence, though, that these are the type of games when we're talking about the inclusion of AI, becoming hyper-personalized potentially, what gives you the confidence that those are the type of games that people want? And I'm asking that as it relates specifically to community and the fact that games really are these communal interactive environments where people have somewhat of a shared reality. And so if everything is hyper-personalized, I'm curious to know your perspective about how that shifts people's ability to build community. And you mentioned some of this is already being implemented. What are you seeing that gives you the indication that this hyper-personalization or inclusion of AI is something that people really want? So the interesting thing about games is that the games industry has actually embraced AI for decades.

And so in a way, the latest expression of the technology large language models is new, but the consumer behavior, the patterns around it are actually already existed at. And so that's what gives me confidence that there's demand for some of the new types of gameplay that we talk about. So take AI companions, for example, it might sound like a crazy idea at first blush, but so many iconic games already have AI companions that are pre-examines that are pre-examines. scripted and they don't use large language models, but players have still developed deep, deep attachments with them. A great example is the Halo franchise. There's an AI companion in that game called Cortana, and she talks to Master Chief, comments on what he's doing basically

like as a chip that rides in his helmet, and she tells him where to go next when he's lost, and is there from the beginning to the end of almost every Halo game. And there are millions of people all over the world that adore Cortana, right, fan fiction about Cortana in the Halo universe to the point where I believe Microsoft has integrated Cortana in for its core Windows search function. And in another game, a favorite of mine, The Last of Us, which is a famous Nottie Dog franchise, so it was recently turned into an HBO share. You play as Joel, but then you have Ellie as an AI companion, and she follows you around for basically the entire game. She adapts to your behavior. If you're sneaking somewhere, she'll also sneak with you. If you're just in a

firefight, she helps you out in combat situations, and she has a fully fleshed-out personality that you learn more about over the course of the game. And so for that perspective, AI companions have already existed and are very, very popular, right? And so the idea of just turbocharging desks of large language models to make them more lifelike and enable them to have a wider range of expression and behavior, I think is going to be very well accepted by players. On hyper-personalization, which is the question that you're asking around storytelling and how that works of communities. I think I'm optimistic based on the fact that personalization already happens to a large degree in games. And so role-playing games like Baldersgate 3 have incredibly detailed character builders

where you can customize everything from your skin color to the highlights in your hair, the tattoos in your face, and people spend hours customizing their avatars, right? like their entire YouTube channels dedicated to how to create the most lifelike or the most badass character for each of these games. And let's not forget that a huge portion of the revenue in games like Fortnite and League of Legends comes from selling skins, which are personalized virtual clothing for how your character in my looking game. And of course, we've written about this before,

but one of the oldest RPGs of all time is Dungeons and Dragons, which by definition is a personalized adventure that is told, by a human narrator, a dungeon master, a game master, who basically crafts an improv venture with you and your group of friends, right? And so these are just two examples of personalization in games and an AI companion in games, but I'm optimistic that players have already embraced many of the concepts that generative AI is terrible charging. And so for that perspective, we're not inventing entirely new consumer behavior.

We're just making it easier for players to do what they already want. Yeah, absolutely. And you mentioned a few. say age old games, Halo, Dungeons and Dragons, they've been around for quite some time. Do you see this new technology, or as you said, a technology that has been ingrained in games for also some time, do you see that really benefiting the incumbents who already have these large player bases? Or do you see this kind of fundamental shift where you're going to see completely new winners in this completely new era? How do you think about maybe some of the new

entrance versus the incumbents and who really wins? So I think the incumbents, that's hard on, sort of the big AAA game developers and publishers, they are already going deep into the wave one AI tools and infrastructure that I spoke about. And so I think almost all of them are using ChatGVT, Mid Journey, Adobe Firefly, a bunch of these software tools earlier. And I think they will benefit hugely from them as they'll enable them to make higher quality games faster, get more shots and goal, and so on. I am skeptical, however, that the largest developers will be the ones that create incredibly innovative AI native games of the sort that we spoke about us as the Wave 2 games.

But there are many reasons, but one of them is that if you're a large developer, your business revolves around IP. So you typically have a few key franchises, Halo, Dungeons and Dragons, World of Warcraft, Call of Duty, and your business revolves around launching sequels that has franchises every three years. And so you don't actually need to take that much risk in shipping these sequels. But in most cases, the players themselves actually aren't looking for something too different. Like the next Call of Duty title was like comfort food.

You know exactly what you're going to get, and that's why you enjoy it. So I think the business model of these large incumbents, I think, doesn't support taking too much risk. So I think that's one reason. And second, I posit that the first generation of these AI native games might end up actually looking really silly to traditional game developers. And so they might not actually take them seriously at first. And so take mobile games, for example, which was the last sort of major paradigm shift in games. The winners in mobile games were largely new companies, Supercell, Keen, Zinger, but not the PC console in companies, right? It wasn't electronic arts or Activision or Lycosoff.

And I bet a large reason for this was that if you were an executive producer at Activision, and you looked at a game like Candy Crush in the beginning, you probably thought, hey, this is really silly. Graphics are really bad. There's no multiplayer in this thing. It's a really, really simple puzzle game, and so how can this possibly be good, right? Like how many people will play this thing? But what I think they underestimated is that with each new paradigm of games, a new set of players also comes into the ecosystem. So the folks that played Candy Crush were, for the most part, older woman, and it was an entirely different demographic from the young men that played Call of Duty, for example, right? But the net effect was that it expanded the total pie for games, like the gaming team increased.

And over the course of that, it created several valuable companies. A lot of more recent examples, take a product like Character AI, where you have millions of people to chat with their favorite sort of AI characters. I would guess that the majority of the users of Character AI don't describe it as a game, but you can squint and say, hey, this is a consumer experience that is just as engaging as playing the game. But it's probably not on the radar of many of the traditional game developers, the incumbents that we just talked about. That's such a good point.

So I think in that same vein, I think the most innovative AI native experiences are more likely to be created by startups and teams that are just getting going and are bringing that fresh perspective, I suppose, to coming out at work with a lot of history and baggage around the existing IP that they need to shepherd. Yeah, I mean, I think that's such a good point about just the things that are emerging that people just would not even describe as a game, but if you really think about it, are not so different fundamentally from games. Maybe super quickly, can we touch on the business model? Because as these things fundamentally take new shapes and forms, so to do the things that people are willing

to pay for. But also, when we think about AI, the cost structure is a little bit different too, right? If you're rendering things in real time, that has a real inherent cost to it. And so maybe you could just speak quickly to how you might see the business models evolving, just like we saw it with mobile. And then also maybe things that developers should keep in mind if they are building these new games and are considering completely new business models. So the challenges is that games as a business model have trended towards two models. So one is free to play with a majority of users actually around 90 to 95 percent on average play a game for free and in a minority, five to 10 percent actually monetize. And so the free users entertain the monetizing users. and so they pay off their time, even if they don't spend money.

And so some of the biggest games in the world, like League of Legends, like Fortnite, are free-to-play games. And then the second business model is a premium game. And so a game that is just sold for 20, 30, 40, 50 bucks. You pay for that game up front, and then you never spend again, basically, after that. The challenge is with an AI game. If you have a game that's running a large language model in the cloud, the influence costs of serving users dynamically generated, worlds or tax would probably make either of these models unprofitable right off the bat, right?

Because you're monetizing the user right up front for 50 or 60 bucks, and then you're not on a premium game sale, and then you're not getting any more revenue going forward. Or in a free-to-play model, like 90% of the users are actually just a cost, right, because they're not actually spending any money in the game. My guess is that companies like MidJourney or Character AI have been able to address this of a subscription model. and so basically every power user pays for their own sort of like influence costs, so to speak. And we could see that subscription model also become the default business model for AI games. And I think the gamers would be okay with it as long as they perceived that the value was there. And it's an interesting sort of side point. Subscriptions have actually become more popular in games over the last sort of call it five years,

but the rise of services like Xbox Game Pass, Apple Arcade, and even inside individual games like Fortnite. But they now have season subscriptions, like the Battle Pass, where you play for a certain period of time and you subscribe up front and then unlocks to the perks over the course of the season. So my guess is that subscriptions become more popular for AI games. Yeah, absolutely. One follow-up question there is if people are more linked to their game play, as in the time that they're spending in-game as it relates to inference, do you think that creates a negative feedback loop? Whereas right now, you can kind of, like, you choose to play a game and you can play it for quite some time and really get ingrained in it

and you could say obsessed or addicted to it without additional cost. Do you see kind of adverse relationship there where all of a sudden if my inference is linearly tied to cost, that I may not be as likely to get as deeply involved in a game? Yeah, no, I think that's a great point that games will need to design around. I think the good news is that that same tradeoff of time versus money also currently exist in free-to-play games. So if you recall the early days of Facebook games, take for example Farnville, like the Dekhazinger games, they actually attempted to gate the amount of time

that you spend in the game behind an energy meter. And so every day you would get, call it 20 energy, and every action in the game would cost two or three energy. And when your energy was gone, you could either take a break. And then come back and play again tomorrow. That's how the term appointment gaming came about. Or you could monetize and you could actually spend to refill your energy meter, and that means that enables you to keep going, right?

And so you can imagine a similar thing happening with AI games, where you have some measure of the influence cost for players, and that's approximated by a virtual currency inside the game. And so I think it's just something that game developers will need to design around, but I think that paradigm of, hey, let's balance time versus money. I think already exists, right? Yeah, that's a great point. And you're bringing me back because I spent far too much time playing Farm Bill back in the day.

But to close out, clearly there's opportunity on the table. And I think it really does feel like there is this new era, potentially, of games. And that's exciting. So with that opportunity, where would you start if you're a builder in the ecosystem? What would you be looking at in 2024? I would suggest that if you are excited about games, take your favorite game genre, whether it's a sports game, like an MMO, even chess. or poker or Dungeons and Dragons

and try to reimagine on first principles what it could look like if you were to introduce generative AI into the core gameplay loop. And then see if you can hack together a prototype or team up with friends to hack something together and then come on over and share it to us. Like we love playing crazy games and wild ideas

and the reality of the games industry is that some of the best games got started by solo developers or as mods and passion projects that are built by small team. Data, like PUBG, CounterStrike, like some of the most iconic games were built by very, very small teams. And I think an even more exciting thing is that any time you have a new paradigm shift, like we talked about mobile early on, I think the playing field advantage goes to new teams, the folks that are coming in with a brush perspective. And my guess is that the AI game teams that get it right might actually end up looking very different from the traditional game developers of today. But if you get it right, I think the potential is you can disrupt the $200 billion market

in the fastest growing category of media today. So it's very exciting. Amazing. I agree. It's super exciting. Jonathan, thank you so much for going through this and excited to see what games are built in 2024. Likewise. Thank you.

Speaking of games, data shows that anime is going mainstream. But what is it about the style that makes anime games so uniquely accessible? And as the games industry continues to grow, What can these not-so-niche games tell us about what's to come? I'm Robin. I'm on the A6 and Z games team. My big idea for the year is on anime. So anime is a uniquely accessible art style for both kids and adults. The medium allows for many different story archetypes and player profiles.

There are adventure components, romance hooks, social loops, many other things within anime games that lead to deep player engagement. We're excited because things like Genshin set the new standard for a fully cross-pocket. platform perform a game across multiple device types, GPUs, and frameworks. And there are now many passionate developers that are building new experiences from players everywhere. And so we believe that anime will be a medium

that transcends both different games, genres, art styles, and we're excited to invest across that ecosystem. And we see this in the data too, where anime has become one of the highest grossing genres in the ecosystem, when calculated by average revenue per user or Arpuz, for instance, Mahoyo generated over $3.8 billion for releases like Genshin Impact and Hawkeye StarRail, which is early this year,

Nintendo launched Zelda Tears of the Kingdom, which is on track to be one of the highest grossing games this year. And in 2024, I expect anime's momentum to continue forward to. All right, so Robin, I love this big idea. And I'm sure many of our listeners are familiar with anime, but for those who aren't or just a set of foundation, what actually constitutes anime and maybe how does it differ from other formats like manga or webtoons? Anime is unique because it started from Japanese comics, right? And so it's defined by a few different types of art styles. So one is solid outlines, exactly the features, blocked out colors and textures and lines,

things like enlarge eyes and so forth. It's a little bit different than Webtoon because Webtoons are originally from Korea. And so there's slight artistic differences such as Webtoons tend to be a little bit more pastel and shaded. They also tend to have more rounded shapes instead of the hard lines like anime. But there's no real like hard and fast lines for what defines anime, right? So some people consider Avatar Last Airbender, which is like an American cartoon or RWBWI, which is another American cartoon anime too. And so I think the genre is like pretty broad, I'd say.

It's more defined by like its fan base because most of the core anime fan base likes a wide variety of things across these different archetypes. Definitely. And you mentioned that anime specifically is able to incorporate different components like adventure components or romance hooks or social loops and that generates this really deep engagement. And we see this in the data. We'll get to the revenue in a second. But what do you think it is about anime's style that actually sets that genre apart and allows for some of those components and some of that engagement in the gameplay? Yeah.

So I think in general, different art styles are very targeted at different audiences. And so, for instance, if you take something like Eldon Ring, it's a very hardcore dark fantasy audience or if you take something like Fortnite or Roblox, those tend to be more cartoony or Legoy. And so it tends to skew away younger. And so you only have a certain sub-segment of experiences that's available because your art styles halyards that specific experience. Whereas with anime, like many different types of people and many different age groups and many different demographics really like it. So you can make a casual game, like a match three game. that has, like, anime components, or you can make a romance game where people feel very deeply about the characters, or you can make, like, an action game. And you can see that even with Genshin, right? It's both, like, an action and romance dating game. And so many of these genres can basically combine. And so I think in general, like, anime is just able to combine many different types of player profiles, because, like, a lot of people like anime, and there's a lot of different player types that just, like, gravitate towards the media.

And there's a lot of people playing. I mean, some of the data that you shared and your bigger idea really surprised me. I knew anime was popping off, but some of these games are making tens of millions of dollars per month. That's not per year. And so how are these games monetizing and is the monetization strategy any different from other genres of games? Yeah. So there's typical things like battle passes or IAP or progression loops that you can put in. And so they have like standard monetization techniques that are pretty common in all mobile games. Oh, you buy some boosts or you buy the Battle Pass for the month or so forth. The one thing that's distinguishing about anime gifts in particular,

which tends to drive the high Arpoo, is the gotcha component. And so this evolves from Gasha Ponds in Japan, where basically you used to put like a hundred yen coin into the Gashapon machine and get a random character out. And so this is the same idea with Gacha, where I spend $5, I roll the gotcha, and I try to get like my favorite character, my favorite, like, Husbando or Wifu, essentially.

And so I think there are fair critiques that, This is like similar to gambling in certain ways. But basically, a lot of the best studios have tackled this by making it so that there's a lot of pity techniques and that earn rates and the drop rates for five star characters are like decently reasonable. And so you basically have a lot of different emergent behavior that comes from that too because basically people post YouTube videos of like drop openings and box openings and hey, I got my favorite character. And so it makes for great content. plus it allows for people to have very high spend depth in the game and so that's why you see like

Arpoo's as high as $30, $40, $50 whereas like some other games the Arpoo might be more than like $10 to $20 range so it's potentially $2 to 3X what like a regular game makes. Right and just to clarify Gotcha is those almost like bending machines in Japan where you like insert money

and then you get those like round balls with something in it. Just wanted to clarify that for anyone who wasn't familiar it does feel like certain companies. I think Netflix has announced certain investments in anime. So large companies are, I guess you could say, waking up to this opportunity. But I'd love to just get your take on why it's felt like maybe at least from the outside people were sleeping on this trend and maybe still are in a way. Do you think that'll change? And what do you think maybe has not been capitalized

on by the masses yet? Yeah, I think in the past, when I was growing up, anime was definitely a weird otaku, like, nerdy thing that people didn't like to talk about. And so you have to figure out who also watches anime and only talk about with their friends because you don't want to come off as uncool or watching this weird Japanese cartoon thing, right? And so, I think

anime has changed a lot and gone way more mainstream. So you see things like Juduza Kaizen or Attack on Titan or even the old, like, Naruto Leech series or One Piece getting really big these days. And I think there's just like way more anime viewers. If you look at the stats, I think something like

50% of millennials and now like 70% of Gen Z watch anime. And so like more and more young people are watching converting to the medium. And I think that's why people were sleeping on it before is because people are just like, oh, it's just like little side genre and hobby that like some people like. But actually now it's something that like a lot of people actually really enjoy because there's just many stories that you can tell through the media. And then the other thing I think people didn't realize is the fan base kind of keeps to itself. And so anime fans are extremely, extremely passionate.

And you can just look at the numbers of like how much anime. fans spend on like figurines and merch and games and so forth. But they keep it to themselves, right? And they spend it within their community rather than bringing it out to a wider community because I think there was still that stigma before. Whereas now it's changing. It's sort of similar gaming, right? Like when Fortnite got big and football players started doing four night dances, then you know like gaming is also going mainstream. I think the similar thing is kind of happening to anime now. Yeah, definitely. And I'm curious to hear your take on who you think you could say wins or really dominates this genre as we move forward.

There's obviously big giants like EA or Tencent that have been around forever. I think you mentioned Mahoyo, which has been around since 2011, so a little newer, but still around for a decade or so. But then I assume there's still room for new developers. How would you think about that? And also, what lessons can developers learn from the success or the rise of anime? Yeah, I think, one, it's important to be a devout follower of the medium to be successful. And so I think one of the reasons Mahoyo was so. successful, is their tagline is literally

Otaku Save the World. It was started by a bunch of college kids who are just super passionate about the medium, and they're very specific things about the genre that you have to get right, such as, I think Mohoia really gets right, the specific character design of a lot of its characters. It gets right, a lot of the, like, archetypes

of Zatuna, this is a little sister type of character. There's a lot of archetypes that you get right to make sure that you're, like, doing right by the genre, essentially, and doing right by its fan base. And so I think Mahoy was super successful. of that. And then they also built up its capabilities over time.

So some of the first Honkai games did progressively better, but nothing at like billion dollar scale. And eventually they built up the tech and capabilities to build Genshin, which is now a billion dollar scale, but took like several hundred million dollars to make. And so it takes a while to build up to that genre and

that scale. But I think what's also great about anime, it's not as expensive a medium to develop because a lot of it isn't even about the gameplay. A lot of it's about like the art and the story and so forth. And so you're not building something as deep as like an MMO per se, which might cost you several hundred million dollars. You can build like more casual like mobile things that are like cheaper to develop and cheaper to put out to market. And it's just like an art style, right?

And so you can put out many different types of things. And so I think to answer your question, I think both big players like Mahoyo will continue to generate new hits such as Hawkeye StarRail launches here. But then also I think there's a lot of opportunity for innovation. And we've bet on a few companies in that space, similar to, so Pato Labs and also Odyssey Interactive are both building like anime-style games. One is building an anime action RPG and other one launched at Megastrikers, which is like cable hockey league of legends. And so we're pretty excited for both. We believe that both startup devs and large companies can have a lot of potential in space. Just to close that out, the style itself can probably be enabled by some of the new

technologies that are coming online or becoming more omnipresent. So, AI, XR, what are your thoughts on how those new technologies impact the system and maybe help us invent the new next wave of anime? Yeah, I think AI is definitely an obvious one for anime because it's a 2D art style and it's a very known art style. And so the AI is very coherent and can generate very good assets for the medium. And so you can look at things like Niji Journey, which is a fork of Mid Journey and probably the most common anime, 2D art asset generation right now. And so I'm pretty sure that many people will be generating both like mods and fan art, but also people will be using this in a production setting to get anime games out for cheaper

and getting them out at like very high quality. So I think that will definitely happen for sure. On XR, I mean, you can look at the success of Pokemon Go, for instance. I think XR is like an interesting new medium and we'll have to see what kind of games come out of the medium. But, you know, for large brands, such as like Pokemon, that I think it's like a very innovative use case for like, hey, like we got out of the while, We collect Pokemon anywhere, and it's just like living your core fantasy that you had when we were a child.

I'm not sure exactly what will come of XR because we don't know what we don't know. And I'm sure people will come up with way more inventive things than I can come up with. So I'm just excited to see how the platform develops and see what kind of new devs make cool new game loops on the platform. Totally. Well, this has been super interesting. I mean, it's incredible how many people are engaged with anime games. And then, as we talked about earlier, the revenue is just shocking, like tens of millions per month for some of these games. game. So super excited to see how this trend evolves in 2024. And thanks for sharing your big

idea. Yeah. Thanks for having me, Seth. I hope you enjoyed part two of this series. We do have part three on the way where we've got three more big ideas featuring partners from our American Dynamism and FinTech teams. And if you can't wait and want to see our full list of 40 plus big ideas today, you can head on over to A16Z.com slash Big Ideas, 20 24. It's time to build.